Following Dunbar's four-month archaeological expedition through company files, the skyscraper was reassessed at ranges between $257 million and $400 million for the years 1987 to 1994 — and also hit with a 25 percent fraud penalty. Litigation ensued. Following a nine-year sojourn in federal court, the companies' case against the city was dismissed. The Plan then took the matter before San Francisco's Assessment Appeals Board. The city, however, attempted to settle, twice negotiating deals that would lessen the burden on the Plan — and eliminate fraud penalties. Both times the Assessment Appeals Board (AAB) spurned the settlements. The case went before the AAB in 2001, and the city scored a total victory. The AAB affirmed a change of ownership most definitely took place — and was fraudulently concealed to boot. Litigation recommenced; at one point the assessor's office even took the AAB to court over the appraised value of One Market Plaza's garage.
It wasn't until 2009 that the case ran its course, and San Francisco had just shy of $23 million in additional taxes and fraud payments to show for it. That includes $12.6 million the city refunded the Plan — even after proving it committed fraud — as a concession that the initial assessment was too steep.
Michael Short
Years of litigation in the One Market Plaza case, triggered by Wayne Lesser, earned the city $23 million. Lesser got nothing.
Michael Short
One Market Plaza remains the only
commercial property in the state in which a concealed change of ownership resulted in fraud penalties.
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So what did it take to nail those intent on defrauding San Francisco? Nearly 20 years, for starters. It also required a series of chance discoveries triggered by the complaints of a disgruntled sandwich-maker and legwork undertaken by private individuals — which city employees blew off. It took a hardheaded deputy assessor willing to overrule his lazy subordinates and spend months rooting through heaps of documents. It required an AAB unwilling to accept lenient settlements. And it took a pair of lawyers who would toil for well over a decade and end up receiving nothing in return.
Absent these random and lucky circumstances, San Francisco will not snare the next One Market Plaza. Yet even when bizarre real-estate transactions do come to the city's attention, often it finds there's nothing to be done about them.
After months spent elbow-deep in financial statements and federal filings, the whistleblower thought he'd assembled an airtight case. In a detailed packet he sent to Assessor Phil Ting, he outlined how the Perini Corporation incrementally transferred shares of the company controlling the sprawling Golden Gateway Center "urban residential community" on the Embarcadero to a consortium of interconnected investors. By 1994, Perini was completely divested — but no deed indicated a change of ownership. Nor was the property, currently appraised at $66.8 million per the assessor's website, reassessed as a result.
Yet the assessor and state Board of Equalization noted nothing amiss. The whistleblower uncovered a textbook example of an element of Prop. 13 allowing corporate-owned properties to turn over repeatedly without triggering reassessments. Even when assessors get wind of such events, they're relegated to referees at a professional wrestling match, approving outrageous move after outrageous move, all of which fall within the purview of the rules.
If the sale of the Golden Gateway Center had been of the land, each transaction may have resulted in a reassessment of that chunk of property and an adjusted tax bill. But it was a deal involving the corporation controlling the land — and that made all the difference. Under state law, only transactions resulting in a single person or body obtaining 50 percent or more of a legal entity qualify as a "change in control." State lawmakers never intended for savvy companies to permanently lock in low property taxes by buying in groups. But that's what's happened, repeatedly, since Prop. 13 took effect. In 2002, for example, wine barons E&J Gallo purchased 1,765 acres of vineyards in Napa and Sonoma from Louis M. Martini. But the deal avoided a reassessment, because 12 Gallo family members individually obtained minority interests. "It's not a loophole that was intended," Board of Equalization Executive Director Kristine Cazadd told the Orange County Register. "It smells like, it looks like an acquisition, but we are scratching our heads." Structuring deals to avoid reassessments isn't a cottage industry — it's a skyscraper industry.
One could question the ethics of engaging in such shenanigans, but lawyers failing to exploit the shortcomings of the law are failing their clients. "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury," wrote former federal appeals court Judge Learned Hand in the 1930s. "There is not even a patriotic duty to increase one's taxes.... Nobody owes any public duty to pay more than the law demands."
What the law demands can be most malleable. There's money in avoiding property reassessments, and in not avoiding one. "How to Permanently Reduce Your Property Taxes" reads the headline in a December article by San Jose attorney Bernard Vogel III in a Southern California legal paper. This is no hyperbole, Vogel says. Companies that bought property at top dollar several years ago could be well served to intentionally rejigger their corporate structure in a manner leading to a reassessment, then lock in today's low property values. Even if the market skyrockets, those companies will be paying property taxes based on a current low-end appraisal. Using this maneuver, Vogel says, he lowered the assessment on a client's Santa Clara property from $80 million to $38 million. It's all perfectly legal.
